French PM holds out olive branch to Berlin

JOUY-EN-JOSAS, France (Reuters) - The French government sent a firm message of reassurance to Germany on Wednesday with a pledge to cooperate closely on European integration, seeking to dampen talk that Paris is siding with southern European nations against austerity.

Prime Minister Jean-Marc Ayrault said Paris was determined to press ahead with closer European integration to resolve the euro crisis -- a persistent German demand but a divisive issue for France's ruling Socialist Party, where many are reluctant to cede more authority to Brussels.

Ayrault also told a conference of business leaders that, with the euro zone's debt crisis weighing heavily on France's economy, his government's top priority was to restore stability to Europe and this meant France must stick scrupulously to its own EU deficit-cutting commitments.

President Francois Hollande's policy of showing sympathy to debt-laden nations like Italy and Spain as they face more austerity demands has stirred concern in some quarters that he is not closely aligned enough with Germany's Angela Merkel.

Yet Ayrault, a German speaker who has input on bilateral issues, said Paris was keenly focused on relations with Berlin, the euro zone's top economy and effective paymaster.

"The new phase of European construction will only be possible on the basis of a Franco-German agreement," Ayrault told an annual conference of France's Medef business chamber. "Franco-German friendship is the heart of the European project."

"The Franco-German couple is more necessary than ever," he said, adding however that this could not be an exclusive pact, and that Italy in particular should also play a "driving role".

His comments, which seemed aimed at silencing any concerns about the Franco-German relationship, were echoed by Foreign Minister Laurent Fabius, who told a meeting of French ambassadors that the Paris-Berlin axis was "crucial" to Europe.

Officials in Berlin have also suggested that Hollande, who won power in May with a campaign against German-led austerity, has recognized that he needs to work closely with Berlin to resolve the four-year-old euro zone crisis.

"The French have finally realized that they need us to get things done in Europe," one senior German official said this week, after a meeting between French Finance Minister Pierre Moscovici and his German counterpart Wolfgang Schaeuble in Berlin on Monday.

People close to Hollande say he is working on keeping his communication with Merkel clear and seeking a common approach on key issues like the euro, despite their differing sensibilities. "They are frank with each other," said one source.

DETERMINED TO KEEP GREECE IN EURO

Last weekend, Hollande followed Merkel's firm line after meeting with Greek Prime Minister Antonis Samaras in Paris, saying Greece must show its commitment to reform before receiving further aid from Europe.

Ayrault, however, made it plain that France continues to favor further support for southern Europe.

"Integration with solidarity that means, in the short term, that we are determined to do everything to keep Greece in the euro zone," he told the conference.

"It also means strengthened stabilization mechanisms for our partners in southern Europe. In this context we must push ahead quickly with a banking union," he said, referring to plans for joint European bank supervision.

He reiterated that France was determined to retain its financial credibility by hitting its 3 percent deficit target next year, though he recognized that this would require paring back spending next year.

The government needs to find some 30 billion euros ($38 billion) in deficit cuts next year, half of which it has said will come from spending.

"But budget restraint alone is not enough, we see that today in the countries of southern Europe: without growth, nothing is possible," he said.

Further economic integration in Europe could not take place without reforms to deepen the democratic responsibility of European decision-making, Ayrault said, adding that Paris would make proposals on the issue soon.

Ayrault also sought to comfort corporations alarmed by billions of euros in tax rises in this year's budget, telling the Medef conference that an upcoming tax reform would help to improve France's flagging competitiveness -- an apparent reference to plans to reduce social charges on labor.